Is it Better
to Buy Gold Bullion or Gold Shares?
By Julian D.W. Phillips

This is a
snippet from the Gold Forecaster. The newsletter
that covers all pertinent factors affecting the
gold price [with a 95% accuracy rate].-

Global equity markets have changed over the last
three years, investor capacities and
capabilities have changed as have interest rate
patterns. This makes it incumbent upon investors
to re-examine this question from the ground up.

The value of Dividend Yields

In the days of yesteryear, long-term investors
bought shares because of growth potential and in
particular for the income they would earn from
shares and its growth. The share price would
then focus on dividends and potential dividends
rising or falling in line with such growth or
lack thereof. Capital appreciation would follow.
Present and future Dividend Yield was usually
tempered [as was the share price] in the booms
and busts, by relating it to the average 5 to 10
year fixed interest rate yield. This was because
one had to ask, ‘what would the advantage be in
investing in risky equities, when one had the
benefit of risk-free fixed interest securities’.
The potential of the equity shares could then be
related to the state of the economy insofar as
it related to interest rates.

We now maintain that such value assessments
should come out from yesteryear and find their
place in today’s portfolios. With the ‘baby
boomer’ generation reaching retirement now,
their Pension funds have to switch to paying out
regular amounts to this group, while the current
far smaller group of future pensioners are not
contributing sufficient amounts to these funds,
to allow their payments to service this growing
bulge of pensioners now retiring. The shortfall
will have to come from the income stream of
investments.

“Earnings don’t Count”

Then the optimism of the early eighties grew and
a culture of ‘earnings don’t count’ came onto
the scene. The workforce contributions to future
pensions was far more than enough to service
existing pensioners and still contribute to the
capital for investment into the funds. This
allowed institutional investors to ignore a
clear income stream to investors and to focus
entirely on capital growth reflecting the
growing size of the investment.This assumed that
share prices would reflect this growth and make
any income stream irrelevant. Investors have
bought into this and did so right through the
summer days of the markets from the early
eighties to 2007. In many, many cases this led
to price earnings ratios to rise to well above
30 times.

If we refer back to the Earnings concept, this
meant that the company’s share price was
discounting 30 years worth of earnings a very
rosy view of the future and potential growth.
Ah, you may well counter, the value of each
share would rise higher than any such concept,
so would justify such a view. And if we lived in
a world where summer was perpetual, this would
be true. But the winter of August 2007 changed
all that.

We now need a share for all seasons and that
brings us back to scene where shares should be
bought that will do well in bad days and grow in
value [followed by price], in the dark days. We
come back to not just the sound concept of
‘total return’ but how to benefit from a growing
income stream that leads to share price growth,
making ‘total return’.

Investor failure

In 2007 the quality of good companies was sound
and measurable, but even those share prices
tumbled alongside most markets, Why? Share
owners found the need to liquidate portfolios to
cover cash gaps elsewhere. Leveraged markets
came under the most pressure as bank loans
became harder to keep and prices fell across the
board forcing more liquidation. Prime asset such
as the housing markets were the focal point of
price collapses. Bear in mind the replacement
costs of those houses did not fall. All these
prices fell because of investor failure brought
on by credit failure, not because value fell
away from good companies. And such investor
failure and potential investor failure has not
gone away. Should we now lurch into a double-dip
recession it will hammer values once again!

Please note that equities as a class of
investment fell right across the board including
gold shares after August 2007. The gold price
was rising, but investors did not have the
capacity to ensure gold mining share prices
would rise. Yes, gold Exchange Traded Fund share
prices rose alongside the gold price, but that
was because there was no corporate risk between
the gold price and those shares.

Shares that will survive such a winter and whose
price will grow are out there and are in the
gold market, at the right price.

Shares ‘for all seasons’ are out there

In short, good shares that should be in a
portfolio have to pay for their keep. [We have
our own favorites in the Gold
Forecasternewsletter we issue on a weekly
basis.] We will say now that that excludes a
large number of sound, large companies that
don’t put investor interests and requirements
first. And it is those companies that do badly
when winter sets in.

Gold mining equities ‘feel’ only the average
gold price over its entire financial year. Yes,
they tend to discount the gold price during that
year, even ahead of the average gold price. Now
that there will be a greater emphasis placed on
dividend streams, only when a company decides
its profit distribution policies at the end of
its financial year will the investor taste any
benefit. These can be greater than the gold
price, as certain select gold mining company
share prices can outrun the gold price. So the
emphasis on choosing well cannot be stressed
enough. It starts with defining just what you
want from the gold share investment.

The benefits of gold bullion

In many investors’ minds gold bullion is the
only investment in extreme times, because of its
portability, un-printability, etc. It will be
‘the ultimate bubble’ in the days to come, as
George Soros said recently. But there are
several categories that gold bullion fits into
before that.

As a portfolio diversifier.
As a ‘counter to swings’… in all currencies.
As a corporate-risk free investment.
As a thermometer-like measure of the state of
the global economy.
Bullion ‘feels’ the rise and fall in the gold
price instantly.
In each of these roles it can serve investors
well as seen since 1999. For those who amazingly
cling to the idea that it gives no [income
return] we point to its exceptional ‘total
return’ in that period when it rose from around
$275 to today’s $1,125.

Its one disadvantage is that it is vulnerable to
government interference and confiscation. Gold
miming companies are vulnerable to government
nationalization and taxation. In rare
situational cases gold bullion can escape such
government interference. [Contact us direct for
more information on this
gold-authenticmoney@iafrica.com ]